Bankruptcy isn't the end of the world. In some cases, it offers a company a new lease on life -- literally.

Women's apparel retailer Braun's Fashions offers a great example. In July 1996, the company declared bankruptcy because it was being squeezed dry by losses at 50 of its store locations. Before the final plan became effective that December, Braun's had rejected these unprofitable leases and renegotiated better terms for 46 stores.

The reorganization required it to issue 617,516 shares and $10.3 million worth of 12.3% senior notes to creditors. Yet in the process, Braun's also liquidated old inventories, improved inventory controls, and reconfigured its distribution center. It also beefed up its management team.

As a result, inventory turns have steadily improved from 3.2 for FY97 (ended February 1997) to 3.7 for FY98, to 3.9 for FY99. Meanwhile, same-store sales jumped 10% in FY97, 10% in FY98, and 3% in FY99.

What last year's modest comp-store gain veils is that the company's now healthy performance created an ample $8.8 million in operating cash last year. That allowed Braun's to pay down some of its debt and buy back stock, both of which spruced up earnings per share (EPS).

In FY99, for instance, the company repurchased senior notes with a principal face value of $4.7 million after buying back $1 million worth the year before. It also bought 368,000 shares for $3 million ($8.15 per share), reducing the outstanding shares by about 8%.

So while Q4 FY99 sales increased 15% to $31.4 million, EPS excluding one-time items dressed up 54% to $0.43. For the year, sales rose 11% to $110.1 million, but earnings sported a highly fashionable 27% gain to $1.30 per share.

With the help of existing cash on hand, Braun's spent another $4.8 million to open 24 new stores (including the first in upstate New York), complete 5 store remodelings, and install new management software. In February, the company also announced it would open 30 net new stores this year but would christen them Christopher & Banks after its in-house brand.

Based in Minneapolis, Braun's is a specialty apparel retailer focused on serving 35- to 55-year-old working women with families that have average annual household incomes of $35,000 to $75,000. It operates 210 stores in 24 states, mainly in mid-sized markets in the Midwest. The average store size is 3,400 square feet.

The company offers four main categories of merchandise: sportswear (53.6% of FY99 sales), sweaters (29.3%), dresses (12.1%), and accessories (5%). Sweaters and dresses represent a growing part of the sales mix.

Last year, the company directly imported 53% of its products from overseas. Its private label Christopher & Banks brand comprised 87% of FY99 sales, up from 80% in FY98. This year, it's expected to generate 90% of revenues.

Balance SheetCash: $9.2 million
Current Assets: $24.4 million
Current Liabilities $8.5 million
Long-term Liabilities: $6.1 million

RatiosPrice-to-earnings: 11.4
Price-to-sales: 0.6

HOW COULD YOU HAVE FOUND THIS DOUBLE?

As a small-cap, Braun's hasn't attracted much attention. Gina Paglucia, an analyst at the small Boston-based firm of Fechtor, Detwiler & Co., did issue a "buy" report in April 1998, but no one seemed to notice. Institutional investors just aren't much interested in such a tiny stock.

Individuals, though, have had plenty of chances. Although same-store sales proved weak last fall due to the unusually warm weather, the company advertised its solid financials. On November 10, it issued a press release noting that it had repurchased some of its debt. A week later, it announced plans to buy back a chunk of stock. And it did, immediately.

But anyone who noticed the year-end results reported in April would have seen rising profit margins, the solid financials, and the depressed stock price. It wasn't too late to capture most of this Double.
WHERE TO FROM HERE?

On June 16, Braun's announced terrific first quarter FY2000 results. Revenue jumped 17% to $29.2 million while net income increased by a stylish 41% to $1.5 million. EPS rose a stunning 55% to $0.34 per share versus $0.22 in the year-ago period.

Even granting that some of that good news resulted from lower interest expenses and the reduced share count, operating income soared 35%. Same-store sales roared ahead 9% even on top of a similar 9% comp-store gain in Q1 FY99. Gross margins increased 70 basis points, partly due to strong acceptance of its merchandise, which resulted in fewer markdowns. Selling, general & administrative (SG&A) expenses as a percentage of sales also declined 27 basis points to 24.34%.

And the fashion hits just keep on coming. The retailer's June same-store sales rose 17% while overall sales leaped ahead 29%. July brought more of the same, with comps up 14% and overall revenues increasing 26%.

Moreover, the new store rollout is on plan. Year-to-date, Braun's has opened 18 new stores under the Christopher & Banks name. It's also begun to change the names of existing stores, identifying its stores with its in-store brand. The sales gains and the store expansion more than justify the 19.4% higher inventories Braun's carried at the end of May.

The company is up against FY99 same-store sales gains of 5% this month and next. However, the hurdle drops for the rest of the calendar year before picking up to a 4% average for the fourth quarter ending in February. So Braun's shouldn't have any trouble meeting the current FY 2000 earnings estimate of $1.59 per share.

With the stock now trading at just 10x that estimate and the long-term growth pegged at a reasonable-sounding 17.5%, Braun's still looks like a value. Clearly, rising interest rates create fears of a consumer slowdown, especially if the stock market continues to simply churn. And otherwise interested investors might decide to turn a cold shoulder to Braun's merely for that reason.

Still, the company appears to have momentum in a sector where momentum indicates you're doing a lot of things right. Investors who can handle the volatility of a small-cap retailer should take a closer look.